All Commentary
Tuesday, January 19, 2010

Haiti and the Broken-Window Fallacy

Earthquakes are not creative destruction.

In the days following the tragedy we are now witnessing in Haiti, I was wondering how long it would take before someone in the media would commit the broken-window fallacy — the belief that destroying a valuable asset will create net wealth as long as it’s replaced.  That is, paying $100 to replace a broken window somehow creates more prosperity that having an intact window and spending that $100 on something else.  What I didn’t expect was to find it splashed across an entire page of the Wall Street Journal.

In the midst of reports of the continuing misery in the earthquake’s aftermath, there it was, covering the front page of the “Weekend” section, a full-page spread on how we seem to have lost sight of the “truism of the modern age that disasters were instruments of progress.”

The author, Kevin Rozario, an associate professor of American studies at Smith College, explains how after the great fires of Lisbon (1755), London (1666), Boston (1676), Chicago (1871), and San Francisco (1906) “the enormous reconstruction projects demanded … put capital into circulation, produced enormous profits for some and enabled economic innovations that increased productivity.”  He goes on to argue, citing the Journal, that the Northridge earthquake of 1994 “generated intermediate- and long-term economic gains that more than offset initial losses.”  And after noting that the Sichuan earthquake of 2008 did kill 80,000 people, he sagely reminds us that after all it did “trigger a building boom that would boost national economic growth by 0.3%.”

Is he serious?  Yes, I’m afraid he is.  And they say that economists are cold and calculating!

This is the same “logic” behind the notion that the bombing of great cities to rubble during World War II was good for economic development because it was an opportunity to construct modern infrastructure that would have otherwise required many years to put in place.  Heaven forbid that we should have to wait for economic depreciation and normal wear-and-tear!  (It was, however, good for New York, which had the great fortune of being the only major western city left standing after the war, but that of course was because New York itself was not air-bombed.)

The fallacy becomes clear when, by logical extension, one ought then to recommend deliberately making our cities vulnerable to natural disasters, by perhaps refusing to build sea walls and tremor-resistant structures.  Why wait for disasters?  We should invite them!  Why waste resources on homeland security when just one well-placed nuclear bomb could boost our own economy, perhaps by as much as 0.3 percent?  Think of the jobs!  If you’re not into bombs, then how about advocating a new wave of 1960s-style “urban renewal” by unleashing an army of federal bulldozers onto our major urban areas?

Professor Rozario appears to be sufficiently innocent of economics (or even common sense) to interpret Joseph Schumpeter’s famous description of the competitive forces of capitalism as “gales of creative destruction” literally.  He is evidently unable to distinguish metaphor from reality; between the “creative destruction” manifested in the competition from new products, innovations, and markets pushing out established businesses — which is what Schumpeter was actually referring to — and, well, real gales (and earthquakes and other natural disasters).

Prosperity Just Around the Corner?

Does this mean that Haiti will now prosper?  No, here Professor Rozario explains, the problem is that it is not the sort of “dynamic, robust capitalist economy” for which he claims death and destruction would be good for business.

And what makes those things good for business? Well, in the case of Katrina-ravaged Gulf coast, it’s been “a fervent commitment to capitalist development.”  In relatively impoverished regions “disasters have often been truly disastrous for the poor.”  (Why it’s also not “truly disastrous” for all the other victims he doesn’t explain.)  He points out (correctly), for example, that in Florida and New Orleans poor homeowners have been encouraged to rebuild and expand settlements “along vulnerable coastal zones, and thereby increasing the likelihood of future destruction.” Being innocent of economics, or evidently of economic history, Professor Rozario fails to mention how decades of government-funded programs to subsidize flood insurance in Florida and massive levy-building along the Gulf coast might have helped create the very situations he is bemoaning.

Moreover, Haiti hasn’t exactly been a bastion of capitalism, unless you have in mind the kind of intervention practiced by the International Monetary Fund.  But this is indeed what Professor Rozario means by “capitalist development.”  I won’t argue over terms here.  If he wants to define “capitalist development” to include public-private partnerships, government-subsidized infrastructure expenditure, and mild top-down central planning, that’s his prerogative.

That, however, has nothing to do with the “free-market capitalism” that Ludwig von Mises, F.A. Hayek, and Milton Friedman so staunchly defended.  Instead, it’s what Mises termed “interventionism,” one of the tragic unintended consequences of which is further immiserating the poor.

The poor do suffer disproportionately from natural disasters, and wealthier people and regions do recover from such things much more quickly than poorer ones.  But we know, in part thanks to the work of James Gwartney, Robert Lawson, and others, that greater economic freedom translates to greater prosperity and wealth per person.

It’s economic freedom that’s most needed in Haiti, and not natural catastrophes, even should it grow into the kind of robust economy in which Professor Rozario thinks physical destruction is good for business.  Please, let’s stop trying to spin these kinds of disasters into economic stimulus packages or into anything other than the human and economic tragedies that they are.

Find a Portuguese translation of this article here.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.